SVB Financial Group (SIVB.Q) -- parent of Silicon Valley Bank -- is continuing its epic run. In spite of a pandemic-induced recession and near-zero interest rates, the stock increased 54% in 2020 and is up another 18% in 2021 at Wednesday's prices. The reason? A stellar conclusion to its fiscal year and a rosy initial outlook for the year ahead. And given the growth this banking specialist expects, shares still look like an incredible long-term value to me.
A special financial institution for the fastest-moving segment of the economy
First, some full-year highlights. SVB posted interest income (from loans to clients) of $2.24 billion in 2020, a decline of 3% from 2019. Non-interest income (from investment banking and gains on equity investments) was up 51% to $1.84 billion. As a result, SVB's earnings per share were 5% higher year over year for full-year 2020.
These results are impressive given the economic freeze last spring from the COVID-19 lockdown, as well as the U.S. Federal Reserve lowering interest rates to zero in an attempt to keep the economy moving forward (lower interest rates mean lower interest income for banks).
But SVB is no normal bank at the mercy of the economy and short-term interest rates. It's a niche financial institution that caters to disruptive companies in life sciences, healthcare, and technology, and the executives, employees, and venture capital investors of said companies. In fact, SVB boasts having 50% of all venture capital-backed businesses in the U.S. as clients, as well as 68% of venture capital-backed businesses that went public in 2020. SVB has an equity stake in many of these early-stage disruptive outfits, and given that last year set a record pace for tech companies going public, suffice it to say this bank was able to successfully navigate the macroeconomic challenges that bogged down other financial institutions.
A bank, but so much more
The world left in the wake of COVID-19 will be more dependent on technology, and old organizations slow to adapt are ripe for the picking. 2021 is picking up where 2020 left off with plenty of companies going public. Flush with cash and growing fast, this is a great segment of the economy to provide banking and financial services solutions.
Sure, SVB will get some upward lift if interest rates gradually rise again over time. In fact, its total loans to clients at the end of 2020 were $45.2 billion, compared to $33.3 billion a year ago. But this is much more than an interest rate-dependent firm. As its disruptive company clients continue to make headway, SVB will benefit too as their banking balances rise and equity stakes grow in value. For investors looking for an easy way to invest in early-stage venture capital-backed businesses, SVB stock is a short cut into the space.
Besides lapping the worst of the pandemic lockdown from last spring, SVB also expects double-digit percentage growth in its client loan and deposit balances in the year ahead. It also recently went shopping and purchased Boston Private Financial Holdings (BPFH) for $900 million to bolster its wealth management capabilities. I've been optimistic about SVB's prospects, but the outlook for the year ahead looks better than ever. With a market cap just shy of $24 billion and trading for 21 times trailing 12-month earnings per share, SVB's stock can be bought for a reasonable price, and it remains my top bet on the banking industry in 2021. Given how important disruptive technology companies are becoming, I see plenty of upside for this financial services firm in the years ahead.